The main legislation governing M&A in Japan includes the Corporate Law, the Financial Instruments and Exchange Law (the FIEL) and the Anti-Monopoly Law, as well as the tax laws which are important for structuring a transaction. In addition to the above, bankruptcy laws (especially the Civil Rehabilitation Procedure) are increasingly important due to the increase in bankruptcy-related transactions resulting from the current worldwide financial crisis. The Foreign Exchange and Foreign Trades Law (the FEFTL) is also important for cross-border M&A activity.
In addition to the above legislation, it is worth noting that there are various guidelines published by governmental organisations and stock exchange rules that have a significant influence on M&A transactions involving listed companies in Japan. Such guidelines include the Guidelines on Management Buyouts for the Purpose of Enhancing Corporate Value and Securing Due Process, published by the Ministry of Economy, Trade and Industry on September 4 2007.
While there have been several important legislative amendments over the past year, there has been nothing as significant as the changes resulting from the implementation of the new Corporate Law in 2006 and the FIEL in 2007. But due to the increasing number of M&A transactions involving public companies over the last few years, there have been a number of notable court cases relating to M&A transactions. Those cases are expected to help establish a more stable structure for M&A transactions.
Due to the current global recession, the type and nature of M&A transactions has been changing. M&A transactions between companies in similar business fields contemplating strategic alliances and reorganisations have been particularly interesting. One of the symbolic deals of this type was Panasonic Corporation's acquisition of Sanyo Electric, where the principal line of business of both companies was the manufacture and sale of electronics and electric equipment. On the other hand, M&A transactions of a more purely financial or investment-type nature have decreased in the past year.
According to Mergers & Acquisition Research Report, the largest M&A transactions relating to Japanese companies announced in 2008 were Mitsubishi UFJ Financial Group's purchase of an equity stake in Morgan Stanley for ¥948,860 million ($9.65 billion); Takeda Pharmaceutical Company's acquisition of Millennium Pharmaceuticals for ¥899,888 million; Shinsei Bank's acquisition of GE Consumer Finance for ¥580,000 million; and Panasonic Corporation's acquisition of Sanyo Electric for ¥567,098 million. It was also reported that tender offer activity, which achieved a record amount in 2007 (¥3,149 billion), decreased in amount to ¥986 billion in 2008.
Foreign restrictions
Under the Corporate Law, the transfer of the shares or business of a Japanese company to a foreign entity pursuant to a mutual agreement between the buyer and the seller may be freely consummated. Japanese law does not permit a foreign corporation to merge directly with a Japanese corporation; however, the shares of a foreign corporation may be used as consideration in statutory corporate reorganisations involving Japanese corporations, such as statutory mergers, stock swaps and corporate splits (demergers) under the Corporate Law. For example, a foreign acquirer that wants to acquire a Japanese company may use a triangular merger whereby it forms a new Japanese subsidiary into which the target Japanese company will be merged, with shares of a foreign company being distributed to the target Japanese company's shareholders as consideration. This type of transaction has only been permitted since May 2007 when prior restrictions on merger consideration (which limited consideration to shares of the surviving Japanese company) were lifted, and there have subsequently been a couple of cross-border transactions consummated using a triangular merger structure.
The FEFTL regulates foreign investors in Japanese companies. In most cases, foreign investors are only required to file a report with the Bank of Japan within 15 days of an inward investment that includes any acquisition of shares in a closely held company, or an acquisition of more than 10% of a publicly listed company's outstanding shares. Prior notification requirements for inward foreign direct investment, however, apply to specific cases such as investments from entities in countries that have not been approved (more than 160 countries are approved), or investments in certain regulated industries.
Disclosure
In statutory corporate reorganisations such as statutory mergers, stock swaps and corporate splits under the Corporate Law, there is a list of matters that must be disclosed. Among other things, information relating to adequacy of consideration must be disclosed. In a triangular merger, the matters to be disclosed are more detailed than is the case with a statutory corporate reorganisation that uses the shares of the direct acquirer as consideration.
There are also a number of disclosure requirements in connection with tender offers. The tender offer regulations under the FIEL generally apply when certain percentage acquisition thresholds are to be crossed as a result of off-market (and certain types of on-market) purchases. A public tender offer would ordinarily be required if such off-market transactions of a listed company would result in ownership of more than one-third of outstanding shares, but they may also be applicable in some situations when a 5% threshold would be crossed.
While there were a number of notable amendments to the FIEL that became effective as of December 2008, several stiffened the sanctions for violations of disclosure requirements. For example, an administrative monetary penalty system has been implemented in relation to tender offer statements and other documents filed by tender offerors. The FIEL already imposed civil liabilities and criminal penalties in relation to tender offer statements. Unlike criminal liabilities and civil liabilities, however, administrative penalties can be imposed without proof of negligence on the part of a tender offeror so long as a document contains false statements with respect to any material facts, or omits to state any material facts required to be stated. Thus, it is intended that the implementation of an administrative monetary penalty system will be more effective in deterring violations of disclosure obligations.
An administrative monetary penalty system was also implemented in connection with shareholders who neglect to submit required reports with respect to large shareholdings or who make material mis-statements or omissions in connection with those reports. Under the FIEL, a holder of more than 5% of the shares of a listed company is generally required to submit a large shareholding report and thereafter has certain continuous reporting obligations.
These amendments are part of a concerted effort by the Japanese government, stock exchanges and other related parties to improve market transparency.
Takeovers
A takeover can be achieved through a statutory corporate reorganisation, such as a statutory merger, stock swap or corporate split, as well as through a contractual business transfer, share acquisition or some combination of the above. Control may also be acquired through the target company's issuance of shares, stock acquisition rights, or convertible bonds, particularly in cases where the target company is seeking new capital.
When an acquirer contemplates acquiring 100% of the shares of a listed company using cash consideration, it ordinarily conducts a tender offer to purchase a significant percentage of the shares of the target as a first step. After successful completion of the tender offer, the acquirer would then proceed to cash out any remaining minority shareholders using either a statutory corporate reorganisation or a somewhat technical scheme involving classified shares.
If the acquirer is itself a listed Japanese company and wants to use its own shares as consideration, it is not uncommon to conduct a statutory corporate reorganisation with the target without a first-step tender offer.
As stated above, as a result of the increasing number of M&A transactions involving listed companies over the last few years, there have recently been decisions issued in several notable court cases relating to takeover transactions.
Examples of the issues addressed by these cases include the following:
i) Right of access to a list of shareholders by a shareholder who was a business competitor of the target in the context of a proxy fight (Tokyo High Court, June 12 2008): The court set forth a rule that permitted the business competitor of the company to access the company's list of shareholders.
ii) Issuance of new shares to a White Knight in the context of a contest for corporate control (Tokyo District Court, June 23 2008): The court enjoined the issuance of new shares to the White Knight pursuant to a primary purpose rule that has been adopted as a general rule by a number of court decisions. Generally speaking, this rule provides that the issuance of new shares can be enjoined by action of shareholders if the primary motive and purpose of the board for issuing new shares to a third party is to affect the contest for corporate control, rather to procure funds.
iii) Appraisal of the fair value of shares of the target company in a cash-out process conducted as a part of a Management Buy-Out (MBO) transaction (Tokyo High Court, September 12 2008): The court stipulated that in deciding the fair value of the shares acquired in a cash-out process, it is necessary to take into account the expected future price increase of which the shareholder would be deprived as a result of compulsory acquisition, in addition to the objective value of the share. As a result, the court appraised the shares to be acquired in the cash-out process at ¥336,966 per share, as opposed to the ¥230,000 per share amount that was the original price in cash-out process offered by the target as well as the offer price proposed by the acquirer in the first-step tender offer.
iv) Insider trading regulations in the context of an attempt to acquire a significant portion of shares of a listed company without approval of the target's board (Tokyo High Court, February 3 2009): This case is a famous criminal case relating to an attempt to acquire a significant portion of shares in a listed radio broadcasting company. The important issue addressed by the court was a determination of the point at which the acquirer's board made the decision to go forward with an acquisition of the shares in the listed company, after which point it would be unlawful for an insider aware of the decision to purchase shares of the target until the proposed acquisition was publicly disclosed.
Transactions involving financially distressed companies
The current economic recession will likely create a number of legal issues for M&A transactions involving financially distressed companies. The issuance of preferred shares is widely used as a means to effect both a financial investment in, and a strategic alliance with, a financially distressed company. Preferred shares are sometimes issued as a part of Debt Equity Swap transaction. The 2006 Corporate Law would likely permit more flexible structuring of the terms of preferred shares than was the case before 2006. Shareholder approval to amend the issuer's articles of incorporation (and to issue preferred shares if the price is particularly favourable) is required in connection with the issuance of preferred shares.
Before the 2006 Corporate Law came into effect in May 2006, it was the majority view in both the academic sphere and among practitioners that a statutory corporate reorganisation, such as a statutory merger, stock swap or corporate split, involving an insolvent company (for example, a statutory merger where the dissolving company has negative net worth) was, in principle, not permitted. There now appears to be an argument that a statutory corporate reorganisation involving insolvent companies could be possible under the new Corporate Law. Some critics are arguing that such a corporate reorganisation is now permitted, but subject to an issue relating to the adequacy of the consideration.
Issues relating to the disclosure of walk-away clauses in a definitive agreement require careful consideration, especially in transactions with financially distressed companies where the failure of the transaction would lead to bankruptcy. A material adverse change clause (Mac clause) is sometimes found in a definitive agreement as a catch-all provision to allow the acquirer to refuse to close the deal in the event of certain unexpected circumstances. Especially in domestic Japanese transactions, the Mac is often provided without a detailed definition. A financing-out clause may also be found in a definitive agreement.
Insolvency procedure
There are three major types of insolvency procedures that are most often used in Japan: the Civil Rehabilitation Procedure, the Corporate Reorganisation Procedure, and the Bankruptcy Procedure. The Civil Rehabilitation Procedure and the Corporate Reorganisation Procedure are designed to return the company to normal solvent trading, whereas the Bankruptcy Procedure is a liquidation-type procedure.
Among these three major procedures, the Civil Rehabilitation Procedure is often used in the context of reorganising a business. The Civil Rehabilitation Procedure is characterised as a debtor-in-possession (DIP) type of process, but subject to supervision of the court and supervisor(s) appointed by the court.
The transfer of control of a company in the process of a Civil Rehabilitation Procedure is often achieved through a business, or asset, transfer to a new sponsor. Under the Corporate Law – and applicable to a company in the process of the Civil Rehabilitation Procedure – a business transfer may require approval of the transferor's shareholders depending on the amount of the transferred assets in comparison with the total assets of the company. However, a company in the process of the Civil Rehabilitation Procedure may omit this shareholder approval requirement and execute a business transfer by acquiring the court's approval instead of shareholder approval, if it meets certain conditions provided in the Civil Rehabilitation Law.
The transfer of control in a Civil Rehabilitation Procedure is also sometimes effected through the acquisition of all the shares by the issuer with no consideration and the issuance of new shares to a sponsor.
Japanese insolvency laws as well as the Japanese Civil Law provide a series of provisions setting out the right to avoid transactions executed by financially distressed companies. Before the amendment to the insolvency laws in 2005, there had been a controversy as to the issue of whether the sale of assets by a debtor for fair consideration is subject to the avoidance right. After amendment in 2005, the insolvency laws now clearly provide that transactions in which a debtor has received reasonable value from the other party may be avoided only when certain conditions regarding the concealment of consideration received are met.
| Author biography |
Yo Uraoka
Mori Hamada & Matsumoto
Yo Uraoka is an attorney with Mori Hamada & Matsumoto. His areas of practice are corporate and financial transactions, with a particular focus on international and domestic M&A transactions, corporate restructuring and acquisition financing. Yo was admitted to the Bar in 2001 in Japan and passed the New York Bar Exam in 2008. He graduated from the University of Tokyo (LLB, 2001) and Law School of University of Southern California (LLM, 2007). |